<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER 001-15251
LABRANCHE & CO INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-4064735
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE EXCHANGE PLAZA, NEW YORK, NEW YORK 10006
(Address of principal executive offices)
(212) 425-1144
(Registrant's telephone number, including area code)
Not Applicable
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]
The number of shares of the registrant's common stock outstanding as of November
15, 1999 was 45,875,000.
<PAGE>
LABRANCHE & CO INC.
FORM 10-Q
<TABLE>
<S> <C>
PART I FINANCIAL INFORMATION....................................................................................4
Item 1. Financial Statements............................................................................4
Condensed Consolidated Statements of Operations.................................................4
Condensed Consolidated Statements of Financial Condition........................................5
Condensed Consolidated Statement of Changes in Stockholders'
Equity and Members' Capital................................................................6
Condensed Consolidated Statements of Cash Flows.................................................7
Notes to Condensed Consolidated Financial Statements............................................8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.....................................................................15
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................................25
PART II OTHER INFORMATION......................................................................................26
Item 2. Changes in Securities and Use of Proceeds......................................................26
Item 6. Exhibits and Reports on Form 8-K...............................................................26
SIGNATURES.......................................................................................................27
</TABLE>
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<PAGE>
EXPLANATORY NOTE
IN AUGUST 1999, LABRANCHE & CO INC. COMPLETED A REORGANIZATION
IN WHICH IT ACQUIRED ALL THE LIMITED PARTNER INTERESTS IN LABRANCHE & CO.,
A REGISTERED BROKER-DEALER AND A SPECIALIST FIRM ON THE NEW YORK STOCK
EXCHANGE, AND THE ENTIRE MEMBERSHIP INTEREST IN LAB INVESTING CO.
L.L.C ,THE GENERAL PARTNER OF LABRANCHE & CO. IN EXCHANGE FOR SHARES OF COMMON
STOCK OF LABRANCHE & CO INC., CASH AND SUBORDINATED DEBT. AS A RESULT, LABRANCHE
& CO INC. IS THE SOLE LIMITED PARTNER OF LABRANCHE & CO. AND THE SOLE MEMBER OF
LAB INVESTING CO. L.L.C.
CONCURRENTLY WITH THE REORGANIZATION, LABRANCHE & CO INC. COMPLETED AN
INITIAL PUBLIC OFFERING OF 10,500,000 SHARES OF ITS COMMON STOCK AND A PRIVATE
OFFERING OF $100.0 MILLION AGGREGATE PRINCIPAL AMOUNT OF 9.5% SENIOR NOTES
DUE 2004.
In accordance with the rules of the Securities and Exchange
Commission, Part I of this report contains historical financial information.
Part II of this report contains pro forma financial information, after giving
effect to the reorganization and related transactions as if they had occurred
on July 1, 1999.
-3-
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
LABRANCHE & CO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(000'S OMITTED EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
--------------------------- -------------------------
1999 1998 1999 1998
-------- ----------- ------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Net gain on principal transactions $ 30,862 $ 15,335 $109,528 $ 56,160
Commissions 8,777 7,968 26,662 18,380
Other 2,003 36 8,945 938
-------- -------- -------- --------
Total revenues 41,642 23,339 145,135 75,478
-------- -------- -------- --------
EXPENSES:
Employee compensation and related benefits 7,743 3,789 19,042 9,018
Lease of exchange memberships 2,121 1,865 6,286 4,642
Interest 2,319 1,045 4,515 2,539
Amortization of intangibles 1,212 846 2,905 1,680
Exchange, clearing and brokerage fees 879 788 2,876 2,148
Occupancy 372 363 1,097 778
Communications 313 242 851 674
Legal and professional fees 257 321 723 586
Other 864 238 1,929 1,853
-------- -------- -------- --------
Total expenses before managing directors'
compensation and limited partners' interest in earnings
of subsidiary (prior to reorganization on
August 24, 1999) and provision for income taxes 16,080 9,497 40,224 23,918
-------- -------- ------- --------
Income before managing directors' compensation and
limited partners' interest in earnings of subsidiary
(prior to reorganization on August 24, 1999) and
provision for income taxes 25,562 13,842 104,911 51,560
MANAGING DIRECTORS' COMPENSATION
(prior to reorganization on August 24, 1999) 7,977 8,780 56,191 32,505
-------- -------- ------- --------
Income before limited partners' interest in
earnings of subsidiary (prior to reorganization on
August 24, 1999) and provision for income taxes 17,585 5,062 48,720 19,055
LIMITED PARTNERS' INTEREST IN
EARNINGS OF SUBSIDIARY (prior to reorganization
on August 24, 1999) 4,290 3,908 25,344 14,756
-------- -------- -------- --------
Income before provision for income taxes 13,295 1,154 23,376 4,299
PROVISION FOR INCOME TAXES 6,124 500 9,913 2,400
-------- -------- -------- --------
Net income $ 7,171 $ 654 $13,463 $ 1,899
-------- -------- -------- --------
-------- -------- -------- --------
Weighted-average shares outstanding 41,536 31,030 38,612 21,995
Basic and diluted earnings per share $ 0.17 0.02 $ 0.35 $ 0.09
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
-4-
<PAGE>
LABRANCHE & CO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(000'S OMITTED)
<TABLE>
<CAPTION>
As of
September 30, 1999 December 31, 1998
------------------ -----------------
(unaudited)
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS $ 72,161 $ 4,722
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL 18,976 21,100
RECEIVABLE FROM BROKERS AND DEALERS 82,431 54,808
SECURITIES OWNED, at market value:
Corporate equities 73,110 114,994
United States Government obligations 1,453 1,468
Other 1,735 1,360
COMMISSIONS RECEIVABLE 3,037 3,009
EXCHANGE MEMBERSHIPS CONTRIBUTED FOR USE, at market value 23,850 12,250
EXCHANGE MEMBERSHIPS OWNED, at cost (market value of $10,600) 6,300 6,300
OFFICE EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost, less
accumulated depreciation and amortization of $377 and $494, respectively 1,405 1,647
INTANGIBLE ASSETS, net of accumulated amortization
Specialist Stock List 93,375 --
Trade Name 26,506 --
Goodwill 52,179 47,532
OTHER ASSETS 8,018 3,011
-------- --------
Total assets $464,536 $272,201
======== ========
LIABILITIES, MEMBERS' CAPITAL AND STOCKHOLDERS' EQUITY
LIABILITIES:
Payable to brokers and dealers $ 4,813 $ 3,892
Securities sold, but not yet purchased, at market value 23,612 67,896
Accrued compensation 1,961 17,735
Accounts payable and other accrued expenses 6,692 6,347
Other liabilities -- 1,341
Taxes payable 5,625 --
-------- --------
42,703 97,211
-------- --------
LONG TERM DEBT 115,815 --
-------- --------
SUBORDINATED LIABILITIES
Exchange memberships, at market value 23,850 12,250
Other subordinated indebtedness 46,508 48,073
-------- --------
70,358 60,323
-------- --------
LIMITED PARTNERS' INTEREST IN SUBSIDIARY -- 37,574
--------
MEMBERS' CAPITAL -- 77,093
[lc12]Signed:[spt][cuha6][ws][cn][cud6][ju]
PREFERRED STOCK, $.01 par value, 10,000,000 shares authorized;
none issued and outstanding -- --
COMMON STOCK, $.01 par value, 200,000,000 shares authorized;
45,875,000 shares issued and outstanding 459 --
ADDITIONAL PAID-IN-CAPITAL 228,030 --
RETAINED EARNINGS 7,171 --
------- --------
235,660 --
Total liabilities, members' capital and stockholders' equity $464,536 $272,201
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
-5-
<PAGE>
LABRANCHE & CO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY AND MEMBERS' CAPITAL
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
(000S OMITTED EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Common Stock Additional Retained Members'
Shares Amount Paid-in Capital Earnings Capital Total
------ ------ --------------- -------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 -- -- -- -- $ 77,093 $ 77,093
Net income (through August 23, 1999) -- -- -- -- 6,292 6,292
Members' capital contribution -- -- -- -- 18,096 18,096
Members' capital withdrawal -- -- -- -- (5,912) (5,912)
--------- --------
Balance, Pre-Reorganization -- -- -- -- 95,569 --
Distributions of members' capital -- -- -- -- (2,183) --
---------
Effect of reorganization 35,375,000 $ 354 $ 93,032 -- (93,386) --
---------
Net proceeds from the initial public offering 10,500,000 105 134,689 -- -- 134,794
Balance after the Reorganization and Initial Public
Offering 45,875,000 459 227,721 -- -- 228,180
---------- --- ------- ----- --------- -------
Net income (August 24, 1999 through September 30,
1999) -- -- -- $ 7,171 -- 7,171
Compensation related to restricted stock units -- -- 309 -- -- 309
--------------------------------------------------------------------------
Balance at September 30, 1999 45,875,000 $ 459 $ 228,030 $ 7,171 $ 0 $235,660
--------------------------------------------------------------------------
--------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of this condensed consolidated
statement.
-6-
<PAGE>
LABRANCHE & CO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(000'S OMITTED)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------------------------
September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 13,463 $ 1,899
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 3,490 2,021
Compensation expense related to restricted
stock units 309 --
Deferred tax provision 96 --
Change in assets and liabilities:
Securities purchased under agreements to resell 2,124 (20,800)
Receivable from brokers and dealers (27,623) 37,080
Corporate equities 41,884 (60,263)
United States Government obligations 15 1,017
Other securities owned (375) (32)
Commissions receivable (28) (1,461)
Other assets (2,472) (1,132)
Payable to brokers and dealers 921 19,903
Securities sold, but not yet purchased (44,284) (22,885)
Accrued compensation other (15,774) 7,336
Accounts payable and other accrued expenses 345 1,136
Other liabilities (1,476) --
Taxes payable 5,529 --
--------- ---------
Net cash used in operating activities (23,856) (36,181)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for office equipment and leasehold
improvements -- (1,205)
Payments for office equipment and leasehold
improvements (140,186) --
--------- ---------
Net cash used in investing activities (140,186) (1,205)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of subordinated debt 3,435 17,150
Repayment of subordinated debt (5,000) --
Net proceeds from initial public offering 134,794 --
Net proceeds from long term debt 97,276 --
Payments to members upon reorganization (9,025) --
Proceeds from contributions to capital 18,096 24,815
Payments for distributions of capital (8,095) (4,362)
--------- ---------
Net cash provided by financing activities 231,481 37,603
--------- ---------
Increase (decrease) in cash and cash equivalents 67,439 217
CASH AND CASH EQUIVALENTS, beginning of period 4,722 2,989
--------- ---------
CASH AND CASH EQUIVALENTS, end of the period $ 72,161 $ 3,206
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR:
Interest $ 4,624 $ 3,346
Unincorporated business taxes $ 6,200 $ 2,244
SUPPLEMENTAL NON-CASH FINANCING ACTIVITIES:
Issuance of subordinated debt and common stock
for redemption of limited partner interests upon
reorganization $ 23,821 $ --
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
-7-
<PAGE>
LABRANCHE & CO INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
The condensed consolidated financial statements include the accounts
of LaBranche & Co Inc., a Delaware corporation (the "Holding Company"), and
its subsidiaries, LaB Investing Co. L.L.C., a New York limited liability
company ("LaB Investing"), and LaBranche & Co., a New York limited
partnership (collectively, the "Company"). LaB Investing is the sole general
partner of LaBranche & Co. and has a partnership interest in LaBranche & Co.
of 84.1%. The Holding Company is the sole limited partner of LaBranche & Co.
and owns the remaining partnership interest of 15.9%. The Holding Company is
also the sole member of LaB Investing, thereby providing the Holding Company
with 100.0% ownership in LaBranche & Co. LaBranche & Co. operates primarily
as a specialist in certain equity securities listed on the New York Stock
Exchange, Inc. ("NYSE").
2. INITIAL PUBLIC OFFERING AND DEBT ISSUANCE
On August 24, 1999, the Company reorganized from partnership to
corporate form and completed its initial public offering. In that offering, the
Company sold 10,500,000 shares of common stock and received net proceeds of
$134.8 million. Concurrently with the offering, the Company issued $100.0
million aggregate principal amount of senior notes. See Note 11 for further
information regarding the long term debt.
3. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
INFORMATION
The unaudited interim condensed consolidated financial information as of
September 30, 1999 and for the nine months ended September 30, 1999 and 1998 are
presented in the accompanying condensed consolidated financial statements. The
unaudited interim condensed consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial information. The unaudited interim condensed consolidated financial
information reflects all adjustments, which are, in the opinion of management,
necessary for a fair presentation of the results for such periods. This interim
condensed consolidated financial information as of September 30, 1999 should be
read in conjunction with the audited consolidated financial statements and notes
thereto included in the Company's prospectus filed with the Securities and
Exchange Commission ("SEC") on August 19, 1999. Results of the interim periods
are not necessarily indicative of results to be obtained for a full fiscal year.
4. INCOME TAXES
Prior to its conversion to corporate form, the Company operated as a
partnership and generally was not subject to U.S. federal and state income
taxes. The earnings of the Company, however, were subject to local
unincorporated business taxes. The members were taxed on their proportionate
share of the partnership's taxable income or loss. Effective with its conversion
from partnership to corporate form on August 24, 1999, the Company became
subject to U.S. federal, state and local corporate income taxes. The
Company accounts for taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes", which
requires the recognition of tax benefits or expenses on temporary differences
between the financial reporting and tax bases of its assets and liabilities.
Deferred tax assets and liabilities relate to stock-based compensation and
amortization of intangibles.
-8-
<PAGE>
As a result of its conversion to corporate form, the Company recognized the
tax effect of the change in its income tax rate on the earnings attributable
to the period from August 24, 1999 to September 30, 1999. The components of
provision for income taxes reflected on the condensed consolidated statements
of operations are set forth below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1999 September 30, 1999
<S> <C> <C>
Current federal, state and local taxes $ 5,529 $ 5,529
Deferred tax provision 96 96
Unincorporated business tax 499 4,288
------- -------
Total tax expense $ 6,124 $ 9,913
======= =======
</TABLE>
5. CAPITAL AND NET LIQUID ASSET REQUIREMENTS
LaBranche & Co., a specialist and member of the NYSE and subsidiary of the
Holding Company, is subject to SEC Rule 15c3-1 adopted and administered by the
NYSE and the SEC. LaBranche & Co. is required to maintain minimum net capital,
as defined, equivalent to the greater of $100,000 or 1/15 of aggregate
indebtedness, as defined.
As of September 30, 1999 (unaudited) and as of December 31, 1998,
LaBranche & Co.'s net capital, as defined under SEC Rule 15c3-1, was $120.4
million and $86.5 million, respectively, and exceeded minimum requirements by
$119.5 million and $85.2 million, respectively. LaBranche & Co.'s aggregate
indebtedness to net capital ratio was .11 to 1 and .24 to 1, respectively.
The NYSE also requires members registered as regular specialists to
establish that they can meet, with their own net liquid assets, a minimum
dollar amount which shall be the greater of $1.0 million or 25% of their
position requirement ("Rule 104.2"). In 1998, due to the concentration of
LaBranche & Co.'s specialist book, the NYSE required LaBranche & Co. to
maintain minimum net liquid assets of the greater of 120% of LaBranche &
Co.'s Rule 104.2 position requirement, or $90.0 million, adjusted by the
amount of the position requirement for any new stock allocations. The
position requirement is the ability to assume positions in stocks in which
they are registered of 30,000 shares of each S&P 500 common stock, 22,500
shares in all other common stocks, 4,500 shares in each convertible preferred
stock and 1,800 shares in each nonconvertible preferred stock. The term "net
liquid assets" for a specialist who also engages in transactions other than
specialist activities is based on its excess net capital determined in
accordance with SEC Rule 15c3-1.
As of September 30, 1999 (unaudited) and as of December 31, 1998,
LaBranche & Co.'s NYSE minimum required dollar amount of net liquid assets,
as defined, was $92.4 million and $90.6 million, respectively, compared to
actual net liquid assets, as defined, of $125.6 million and $103.1 million,
respectively.
On October 5, 1999, the Company contributed additional capital of $50.1
million in cash to LaBranche & Co.
-9-
<PAGE>
6. ACQUISITIONS
Effective August 24, 1999, the remaining limited partnership interests
of $37.1 million in LaBranche & Co. were acquired at an excess purchase price
over the limited partners' capital balances of $127.4 million. The redemption
of the limited partners' interests is accounted for as a step acquisition
under the purchase method of accounting. The excess of purchase price over
the limited partners' capital balances was allocated to intangible assets
and assigned lives as follows:
<TABLE>
<CAPTION>
Amount Life
------ ----
<S> <C> <C>
Specialist Stock List $ 93.6 million 40 years
Trade Name 26.6 million 40 years
Goodwill 7.2 MILLION 15 years
---------------
$ 127.4 million
==============
</TABLE>
The intangible assets are being amortized on a straight-line basis. The
allocation of purchase price and determination of useful lives were based upon
an independent appraisal. The useful life of the specialist stock list was
determined based upon analysis of historical turnover characteristics of the
specialist stocks.
Effective July 1, 1998, LaBranche & Co. acquired the specialist
operations of Fowler, Rosenau & Geary, L.L.C. for an aggregate purchase price
of approximately $45.0 million, representing a 22.4% total general and
limited partner interest in LaBranche & Co. The excess of purchase price over
fair value of net assets acquired was approximately $25.8 million and will be
amortized over 15 years.
7. COMMITMENTS
During 1998, LaBranche & Co. secured a $75.0 million committed line of
credit with The Bank of New York. The agreement matured on June 25, 1999. In
June 1999, the Company amended and extended the committed line of credit to
$100.0 million through June 23, 2000.
These leases contain escalation clauses providing for increased rentals
based upon maintenance and tax increases. Subsequent to September 30, 1999,
the Company amended its existing lease to include the rental of an additional
floor.
Minimum rental commitments under existing noncancellable leases for office
space and equipment are as follows:
<TABLE>
<CAPTION>
Year ending December 31:
------------------------
<S> <C>
1999..................................................$ 728,567
2000..................................................... 673,006
2001......................................................771,750
2002......................................................801,750
2003..................................................... 807,750
Thereafter..............................................4,179,750
</TABLE>
-10-
<PAGE>
8. SUBORDINATED LIABILITIES
LaBranche & Co. is a party to subordinated loan agreements under which
it has indebtedness approved by the NYSE for inclusion as net capital, as
defined. Interest is payable quarterly at various annual rates. One of the
agreements representing $500,000 matures in November 1999, ten of the
agreements representing $6,323,000 mature within the last six months of 2000
and eight agreements representing $4,685,000 mature within the first six
months of 2001. These agreements all have automatic rollover provisions, and
each scheduled maturity date will be extended an additional year, unless the
lender gives LaBranche & Co. seven months' advance notice that the maturity
date will not be extended. The holder of the $500,000 subordinated loan
agreement has notified LaBranche & Co. that the scheduled maturity date will
not be extended.
LaBranche & Co. also issued seven notes representing aggregate
indebtedness of $20,000,000 which matures on September 15, 2002 and bears
interest at an annual rate of 8.17% payable on a quarterly basis.
LaBranche & Co. also issued five notes representing aggregate indebtedness
of $15,000,000 which matures on June 3, 2008 and bears interest at an annual
rate of 7.69% payable on a quarterly basis. These notes are senior to all other
subordinated notes of LaBranche & Co. The agreements covering these subordinated
notes require the Company to comply with certain covenants that, among other
things, restrict the type of business in which the Company may engage, sets
certain net capital levels and prohibits restricted payments.
LaBranche & Co. also issued a subordinated note for $1,300,000 due
March 2, 2001 with an annual rate of 10.0% payable on a quarterly basis. This
agreement has an automatic rollover provision, and the scheduled maturity date
will be extended an additional year, unless the lender gives LaBranche & Co.
seven months' advance notice that the maturity date will not be extended.
Exchange memberships contributed pursuant to subordination agreements in
the amount of $23,850,000 comprise the remaining subordinated liabilities.
9. EARNINGS PER SHARE
Earnings per share ("EPS") are computed in accordance with SFAS No. 128,
"Earnings Per Share". Basic EPS is calculated by dividing net income by the
weighted-average number of common shares outstanding. For purposes of
determining weighted average shares outstanding for periods prior to the
Company's reorganization from partnership to corporate form, the outstanding
shares were determined based on the conversion ratio of members' capital to
common stock issued to the members upon reorganization.
The computations of basic and diluted EPS are set forth below:
<TABLE>
<CAPTION>
Three Months Nine Months Three Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1999 1999 1998 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Numerator for basic and
diluted earnings per share -
net income $ 7,171 $13,463 $ 654 $ 1,899
Denominator for basic
earnings per share -
weighted-average number
of common shares 41,536 38,612 31,030 21,995
------------- ------------- ------------- -------------
Basic and diluted earnings
per share $0.17 $0.35 $0.02 $0.09
</TABLE>
-11-
<PAGE>
Under the treasury stock method of accounting, restricted stock units
representing 1,059,000 shares of common stock and options to purchase an
aggregate of 1,200,000 shares of common stock were not included in the
calculation of diluted earnings per share due to their antidilutive effect.
10. EMPLOYEE INCENTIVE PLANS
EQUITY INCENTIVE PLAN
The Company has elected to account for stock-based employee compensation
plans in accordance with Accounting Principles Board Opinion ("APB") No. 25 as
permitted by SFAS No. 123, "Accounting for Stock-Based Compensation". In
accordance with APB No. 25, compensation expense is not recognized for stock
options that have no intrinsic value on the date of grant.
The Company sponsors an Equity Incentive Plan which provides for grants of
incentive stock options, nonqualified stock options, restricted shares of common
stock, restricted stock units, unrestricted shares and stock appreciation
rights.
A maximum of 4,687,500 shares of common stock has been reserved for
issuance under the Equity Incentive Plan. The maximum number of shares of common
stock with respect to which options, restricted stock, restricted stock units or
other equity-based awards may be granted under the Equity Incentive Plan during
any calendar year to any employee may not exceed 500,000 shares, subject to
adjustment upon certain corporate transactions.
On August 18, 1999, restricted stock units with respect to 1,059,000
shares of common stock were granted to employees who were not managing directors
with an issue cost of $0 to the employees and a fair market value of $14 per
share. The restricted stock units, which are subject to continuing service with
the Company and other restrictions, will generally vest in three annual
installments commencing on the third anniversary of the grant date. For purposes
of determining compensation expense, the total expense of approximately $14.8
million is being recognized over the five-year vesting period on a straight-line
basis. During the nine months ended September 30, 1999, the Company recorded
compensation expense and a credit to additional paid-in capital of $309,000
related to these restricted stock units.
STOCK OPTIONS
On August 18, 1999, options to purchase an aggregate of 1,200,000
shares of common stock were granted to executive officers of the Company. Of
these options, options to purchase 1,000,000 shares, which are subject to
continuing service with the Company and other restrictions, will become
exercisable in three equal annual installments commencing on the first
anniversary of the date of grant. The options to purchase the remaining
200,000 shares will vest on January 7, 2000, subject to continuing service
with the Company, and become exercisable with respect to 100,000 shares on
each of July 7, 2000 and July 7, 2001. Due to vesting requirements, there
were no options exercisable as of September 30, 1999. These options will
generally expire ten years from the date of grant, unless sooner terminated
or exercised. Pursuant to APB No. 25, no compensation expense was recognized
on the date of grant or for the period ended September 30, 1999 since these
options had no intrinsic value. As of September 30, 1999, the outstanding
options had an exercise price of $14 and a remaining life of approximately 10
years.
The weighted-average fair value of options granted through September 30,
1999 was $4.97 per option. Fair value is estimated as of grant date based on a
binomial option pricing model using the following weighted-average assumptions:
-12-
<PAGE>
<TABLE>
<CAPTION>
As of September 30, 1999
------------------------
<S> <C>
Risk-free interest rate 5.25%
Expected life 7 yrs
Expect volatility 40%
Dividend yield 0%
</TABLE>
In accordance with SFAS No. 123, compensation expense was not
recognized on the grant of the options since these options has no intrinsic
value on the date of grant. If the Company were to recognize compensation
expense under the fair-value based method of SFAS No. 123, the net income
would have decreased by approximately $224,000, resulting in pro forma net
income and earnings per share as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1999 September 30, 1999
------------------ ------------------
(000s omitted except per share data)
<S> <C> <C>
Net income, as reported $7,171 $13,463
Pro forma net income 6,947 13,239
EPS, as reported $ 0.17 $ 0.35
Pro forma EPS $ 0.17 $ 0.34
</TABLE>
The effect of applying SFAS No. 123 in the pro forma disclosure above may not be
representative of the potential pro forma effect on net income in future
periods.
ANNUAL INCENTIVE PLAN
The Company also sponsors an Annual Incentive Plan. Managing directors and
other employees designated by management will be eligible to participate. Under
this plan, a compensation pool of up to 30% of the Company's pre-tax income, or
such lesser percentage determined by the compensation committee, will be set
aside for managing directors and other employees selected by the compensation
committee to participate in this plan. In determining the compensation pool, the
compensation expense relating to the grant of restricted stock units at the time
of the reorganization of the Company to corporate form is deducted. Under the
plan, no individual participant may receive more than 25% of the compensation
pool for any fiscal year.
11. LONG TERM DEBT
Effective August 24, 1999, the Holding Company issued $100.0 million
aggregate principal amount of senior notes. The notes bear interest at a rate
of 9.5% annually and mature on August 15, 2004. The carrying value of the
senior notes as of September 30, 1999 is $99.8 million. Debt issuance costs
incurred as a result of the senior note offering are approximately $2.7 million,
which are being amortized as an adjustment to interest expense over the life of
the senior notes. Interest expense incurred for the nine months ended
September 30, 1999 on the senior notes was approximately $1.1 million.
The indenture covering the senior notes includes certain covenants that,
among other things, limit the Company's ability to: borrow money; pay
dividends or repurchase stock; make investments; engage in transactions with
stockholders and affiliates; create liens on assets; and sell assets or engage
in mergers and consolidations. In addition, in connection with the
reorganization of the Company from partnership to corporate form, the Holding
Company issued a note in an aggregate principal amount of $16.0 million as
partial payment for the acquisition of a limited partner interest.
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<PAGE>
Of the $16.0 million total, $6.0 million will be repaid on the first
anniversary of issuance, $5.0 million will be repaid on the second
anniversary of issuance and $5.0 million will be repaid on the third
anniversary of issuance, and bears interest at the annual rate of 9.5%.
Interest expense incurred for the period ended September 30, 1999 on the note
was approximately $158,000.
-14-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY," "LABRANCHE" OR "WE"
SHALL MEAN LABRANCHE & CO INC. AND ITS WHOLLY-OWNED SUBSIDIARIES.
LABRANCHE'S QUARTERLY AND ANNUAL OPERATING RESULTS ARE AFFECTED BY A
WIDE VARIETY OF FACTORS THAT COULD MATERIALLY AND ADVERSELY AFFECT ACTUAL
RESULTS, INCLUDING: A DECREASE IN TRADING VOLUME ON THE NEW YORK STOCK
EXCHANGE, VOLATILITY IN THE EQUITY SECURITIES MARKET AND CHANGES IN THE VALUE
OF OUR SECURITIES POSITIONS. AS A RESULT OF THESE AND OTHER FACTORS,
LABRANCHE MAY EXPERIENCE MATERIAL FLUCTUATIONS IN FUTURE OPERATING RESULTS ON
A QUARTERLY OR ANNUAL BASIS, WHICH COULD MATERIALLY AND ADVERSELY AFFECT ITS
BUSINESS, FINANCIAL CONDITION, OPERATING RESULTS, AND STOCK PRICE. AN
INVESTMENT IN LABRANCHE INVOLVES VARIOUS RISKS, INCLUDING THOSE MENTIONED
ABOVE AND THOSE WHICH ARE DETAILED FROM TIME TO TIME IN LABRANCHE'S SEC
FILINGS.
CERTAIN STATEMENTS CONTAINED IN THIS REPORT, INCLUDING WITHOUT
LIMITATION, STATEMENTS CONTAINING THE WORDS "BELIEVES", "INTENDS", "EXPECTS",
"ANTICIPATES" AND WORDS OF SIMILAR IMPORT, CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995. READERS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS
ARE NOT GUARANTEES OF FUTURE PERFORMANCE, AND SINCE SUCH STATEMENTS INVOLVE
RISKS AND UNCERTAINTIES, THE ACTUAL RESULTS AND PERFORMANCE OF LABRANCHE AND
THE SPECIALIST INDUSTRY MAY TURN OUT TO BE MATERIALLY DIFFERENT FROM THE
RESULTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. GIVEN THESE
UNCERTAINTIES, READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH
FORWARD-LOOKING STATEMENTS. LABRANCHE ALSO DISCLAIMS ANY OBLIGATION TO UPDATE
ITS VIEW OF ANY SUCH RISKS OR UNCERTAINTIES OR TO PUBLICLY ANNOUNCE THE
RESULT OF ANY REVISIONS TO THE FORWARD-LOOKING STATEMENTS MADE IN THIS REPORT.
THIS DISCUSSION SHOULD BE READ IN CONJUNCTION WITH LABRANCHE'S
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO CONTAINED
IN THIS REPORT.
OVERVIEW
Founded in 1924, LaBranche & Co. is one of the oldest and
largest specialist firms on the New York Stock Exchange. Our business has grown
considerably during the past five years. We have accomplished this growth both
internally and through selective acquisitions. Our revenues increased from $29.9
million in 1994 to $126.4 million in 1998, representing a compound annual growth
rate of 43.4%. During the same period, we increased the number of our common
stock listings from 122 to 284.
In August 1999, we reorganized from partnership to corporate form and
completed an initial public offering of our common stock. In connection with our
reorganization, we acquired, in exchange for shares of our common stock, cash
and our subordinated debt, the entire membership interest in LaB Investing Co.
L.L.C and all the limited partner interests in LaBranche & Co. As a result, we
are the sole member of LaB Investing Co. L.L.C., the general partner of
LaBranche & Co., and the sole limited partner of LaBranche & Co. Concurrently
with the initial public offering of our common stock, we issued in a private
placement $100.0 million aggregate principal amount of our 9.5% senior notes due
2004. As a result of these and other factors, period-to-period comparisons
may not be meaningful, and interim period operating results may not be
indicative of the operating results for a full year.
REVENUES
Our revenues consist primarily of net gains earned from principal
transactions in securities for which we act as specialist, and commissions
revenue earned from specialist activities. Net gain on principal transactions
represents trading gains net of trading losses and transaction fees and are
earned by us when we act as principal buying and selling our specialist stocks.
These revenues are primarily affected by changes
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<PAGE>
in share volume and fluctuations in price in our specialist stocks. Share
volume for our specialist stocks has historically been driven by general
trends in NYSE trading volume, as well as factors particularly affecting our
listed companies, including increased merger and acquisition activity, stock
splits, greater frequency of company news releases (I.E., earnings guidance
and reports), heightened research analyst coverage and investor sentiment.
Commissions revenue consists of commissions we earn when acting as agent to
match buyers and sellers for limit orders executed by us on behalf of brokers
after a specified period of time; we do not earn commissions when we match
market orders. Commissions revenue is primarily affected by share volume of
the trades executed by us as agent. Other revenue consists of proprietary
trading revenue and short-term interest income. For the year ended December
31, 1998, net gain on principal transactions represented 75.2% of our total
revenues, commissions revenue represented 21.0% of our total revenues, and
other revenue represented 3.8% of our total revenues. For the three months
ended September 30, 1999, net gain on principal transactions represented
74.1% of our total revenues, commissions revenue represented 21.1% of our
total revenues, and other revenue represented 4.8% of our total revenues. For
the nine months ended September 30, 1999, net gain on principal transactions
represented 75.5% of our total revenues, commissions revenue represented 18.4%
of our total revenues, and other revenue represented 6.1% of our total revenues.
EXPENSES
Our largest operating expense is compensation and benefits. Employee
compensation and benefits primarily consist of salaries and wages and
profitability-based compensation. Profitability-based compensation includes
compensation and benefits paid pursuant to our Annual Incentive Plan to managing
directors, trading professionals and other employees based on our profitability
and the employees' overall performance.
Prior to our reorganization on August 24, 1999, a large portion of the
compensation payments to our managing directors had not been presented as
part of operating expenses. The aggregate amount of these compensation
payments generally approximated LaB Investing Co. L.L.C.'s interest in the
income of LaBranche & Co., before managing directors' compensation, and had
been allocated among our managing directors based on their respective
percentage interests in the profits of LaB Investing Co. L.L.C. Following our
reorganization, as a corporation, we include all payments to managing directors
of compensation, including bounses payable pursuant to our Annual Incentive
Plan, in employee compensation and related benefits expense.
REORGANIZATION
We incurred indebtedness of approximately $116.4 million in connection
with our senior note offering and the simultaneous issuance of subordinated
indebtedness in redemption of certain limited partner interests in LaBranche &
Co. As a result of this increased indebtedness, our interest expense following
the reorganization and related issuances of indebtedness is higher than
historical levels.
Our acquisition of all the limited partner interests in LaBranche & Co.
was accounted for as a step acquisition under the purchase method of
accounting. The excess of purchase price over the limited partners' capital
accounts of $127.4 million was allocated to intangible assets and assigned
lives as follows:
-16-
<PAGE>
<TABLE>
<CAPTION>
Intangible Asset Amount Useful Life
---------------- ------ -----------
<S> <C> <C>
Specialist Stock List $ 93.6 million 40 years
Trade Name 26.6 million 40 years
Goodwill 7.2 million 15 years
---------------
$127.4 million
===============
</TABLE>
The allocation of purchase price and determination of useful lives was based
upon an independent appraisal. The useful life of the specialist stock list was
determined based on an analysis of the historical turnover characteristics of
the specialist stocks. Accordingly, amortization of intangible assets is higher
than prior periods.
INCOME TAXES
As a partnership, we were generally not subject to U.S. federal, state and
local income taxes, apart from the 4% New York City unincorporated business tax.
As part of our restructuring to a corporation, we are subject to U.S. federal,
state and local income taxes.
ACQUISITION
In the third quarter of 1998, we acquired substantially all the assets of
Fowler, Rosenau & Geary, LLC (or "Fowler, Rosenau"). The acquisition was
accounted for under the purchase method and the excess of cost over estimated
fair value of the net assets acquired, totaling $25.8 million, was allocated to
goodwill. The results of the specialist operations formerly conducted by Fowler,
Rosenau have been included in our consolidated financial statements since July
1, 1998.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
REVENUES
Total revenues increased 78.4% to $41.6 million for the three months ended
September 30, 1999, from $23.3 million for the same period in 1998, principally
due to the increase in revenue from net gain on principal transactions. Net gain
on principal transactions increased 101.3% to $30.9 million for the three months
ended September 30, 1999, from $15.3 million for the same period in 1998. This
increase was primarily due to an increase in share volume of our specialist
stocks traded on the NYSE, as well as increased share volume in principal
trading in our existing specialist stocks traded on the NYSE. Our share volume
as principal increased 16.9% to 2.0 billion shares for the three months ended
September 30, 1999, from 1.7 billion shares for the same period in 1998.
Commissions revenue increased 10.2% to $8.8 million for the three months
ended September 30, 1999, from $8.0 million for the same period in 1998. This
increase was due to an increase in share volume in which we acted as agent for
our existing specialist stocks. The share volume executed by us as agent in our
specialist stocks increased 11.5% to 950.2 million shares for the three months
ended September 30, 1999, from 851.8 million shares for the same period in 1998.
Other revenue increased 5,463.9% to $2.0 million for the three months
ended September 30, 1999, from $36,000 for the same period in 1998. This
increase was primarily due to net gains in proprietary trading of non-specialist
securities.
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<PAGE>
EXPENSES
Total expenses before managing directors' compensation and limited
partners' interest in earnings of subsidiary (prior to reorganization on
August 24, 1999) and provision for income taxes increased 69.3% to $16.1
million for the three months ended September 30, 1999 from $9.5 million for
the same period in 1998. After August 24, 1999, we include payments to
managing directors in employee compensation and related benefits expense.
Employee compensation and related benefits increased 104.4% to $7.7
million for the three months ended September 30, 1999, from $3.8 million for the
same period in 1998. This increase was primarily due to the inclusion of
managing director salary, incentive-based bonus and related benefits in employee
compensation subsequent to our reorganization. As a percentage of total
revenues, employee compensation increased to 18.6% of total revenues for the
three months ended September 30, 1999, from 16.2% of total revenues for the same
period in 1998.
Managing directors' compensation (prior to reorganization on August 24,
1999) decreased 9.1% to $8.0 million for the three months ended September 30,
1999, from $8.8 million for the same period in 1998 as a result of the inclusion
of managing director salary and incentive-based compensation in employee
compensation and related benefits from the date of our reorganization, August
24, 1999.
Lease of exchange memberships expense increased 13.7% to $2.1 million for
the three months ended September 30, 1999, from $1.9 million for the same period
in 1998. This increase was due to the increase in the number of leased
memberships from 42 to 44, and was also due to an increase in the average annual
leasing cost of the memberships from approximately $180,000 to $192,000 per
membership. As a percentage of total revenues, lease of exchange memberships
expense decreased to 5.1% for the three months ended September 30, 1999, from
8.0% for the same period in 1998.
Interest expense increased 109.2% to $2.2 million for the three months
ended September 30, 1999, from $1.0 million for the same period in 1998. This
increase was primarily due to the issuance of $116.4 million of indebtedness
which began accruing interest from the date of our reorganization.
Exchange, clearing and brokerage fees consist primarily of fees paid by us
as a specialist to the NYSE and to clearing houses. Fees paid by us to the NYSE
include primarily fees based on the volume of transactions executed as principal
and as agent, as well as a flat annual fee. Exchange, clearing and brokerage
fees expense increased 11.5% to $879,000 for the three months ended September
30, 1999, from $788,000 for the same period in 1998. This increase was primarily
attributable to an increase in share volume.
Amortization of intangibles expense increased 43.3% to $1.2 million for
the three months ended September 30, 1999, from $846,000 for the same period in
1998. Amortization of intangibles increased as a result of the $127.4 intangible
asset recorded as a result of our acquisition of all the limited partner
interests in LaBranche & Co. in connection with our reorganization.
Other expenses increased 66.6% to $1.9 million for the three months ended
September 30, 1999, from $1.2 million for the same period in 1998. This was the
result of a $394,000 increase in advertising and promotional costs.
Income before managing directors' compensation and limited partners'
interest in earnings of subsidiary (prior to reorganization on August 24,
1999) and provision for income taxes increased 84.7% to $25.6 million for the
three months ended September 30, 1999, from $13.8 million for the same period
in 1998.
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<PAGE>
Limited partners' interest in earnings of subsidiary (prior to
reorganization on August 24, 1999) increased 9.8% to $4.3 million for the
three months ended September 30, 1999, from $3.9 million for the same period
in 1998 as a result of our increased profitability. In connection with our
reorganization, we acquired all the limited partner interests in LaBranche &
Co. for an amount in excess of book value.
Provision for income taxes increased 1,124.8% to $6.1 million for the
three months ended September 30, 1999, from $500,000 for the same period in 1998
as a result of the federal, state and local income taxes to which we are subject
primarily as a result of our reorganization from partnership to corporate form.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
REVENUES
Total revenues increased 92.3% to $145.1 million for the nine months ended
September 30, 1999, from $75.5 million for the same period in 1998, principally
due to the increase in revenue from net gain on principal transactions. Net gain
on principal transactions increased 95.0% to $109.5 million for the nine months
ended September 30, 1999, from $56.2 million for the same period in 1998. This
increase was primarily due to an increase in share volume of our specialist
stocks traded on the NYSE. This increase, in turn, was primarily due to the
Fowler, Rosenau acquisition on July 1, 1998 under which we became the specialist
for 76 additional common stock listings, and to increased share volume as
principal in our existing specialist stocks traded on the NYSE. Our share volume
as principal increased 62.3% to 6.5 billion shares for the nine months ended
September 30, 1999, from 4.0 billion shares for the same period in 1998.
Commissions revenue increased 45.1% to $26.7 million for the nine months
ended September 30, 1999, from $18.4 million for the same period in 1998. This
increase was due to an increase in share volume in which we acted as agent. This
increase, in turn, was primarily due to the increase in the number of our common
stock listings as a result of the Fowler, Rosenau acquisition on July 1, 1998
and to increased share volume in our existing specialist stocks traded on the
NYSE. The share volume executed by us as agent in our specialist stocks
increased 47.0% to 2.9 billion shares for the nine months ended September 30,
1999, from 2.0 billion shares for the same period in 1998.
Other revenue increased 853.6% to $8.9 million for the nine months ended
September 30, 1999, from $938,000 for the same period in 1998. This increase was
primarily due to net gains in proprietary trading of non-specialist securities.
EXPENSES
Total expenses before managing directors' compensation and limited
partners' interest in earnings of subsidiary (prior to reorganization on
August 24, 1999) and provision for income taxes increased 68.2% to $40.2
million for the nine months ended September 30, 1999 from $23.9 million for
the same period in 1998.
Employee compensation and related benefits increased 111.2% to $19.0
million for the nine months ended September 30, 1999, from $9.0 million for the
same period in 1998. This increase was due to the Fowler, Rosenau acquisition on
July 1, 1998, which resulted in our employment of 36 additional individuals, and
to the inclusion of managing director salary, incentive-based bonus and related
benefits in employee compensation from the date of our reorganization. As a
percentage of total revenues, employee compensation increased to 13.1% of total
revenues for the nine months ended September 30, 1999, from 12.0% of total
revenues for the same period in 1998.
Lease of exchange memberships expense increased 35.4% to $6.3 million for
the nine months ended September 30, 1999, from $4.6 million for the same period
in 1998. This increase was due to the increase
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<PAGE>
in the number of leased memberships from 32 to 44, primarily as a result of
the Fowler, Rosenau acquisition on July 1, 1998, and to an increase in the
average annual leasing cost of the memberships from approximately $180,000 to
$192,000 per membership. As a percentage of total revenues, lease of exchange
memberships expense decreased to 4.3% for the nine months ended September 30,
1999, from 6.2% for the same period in 1998.
Interest expense increased 72.6% to $4.4 million for the nine months ended
September 30, 1999, from $2.5 million for the same period in 1998. This increase
was primarily due to the issuance of $116.4 million of indebtedness which began
accruing interest from the date of our reorganization.
Exchange, clearing and brokerage fees consist primarily of fees paid by us
as a specialist to the NYSE and to clearing houses. Fees paid by us to the NYSE
include primarily fees based on the volume of transactions executed as principal
and as agent, as well as a flat annual fee. Exchange, clearing and brokerage
fees expense increased 33.9% to $2.9 million for the nine months ended September
30, 1999, from $2.1 million for the same period in 1998. This increase was
primarily attributable to an increase in share volume.
Amortization of intangibles expense increased 72.9% to $2.9 million for
the nine months ended September 30, 1999, from $1.7 million for the same period
in 1998. Amortization of intangibles increased as a result of the Fowler,
Rosenau acquisition, as well as the $127.4 million intangible assets recorded as
a result of our acquisition of all the limited partner interests in LaBranche &
Co. in connection with our reorganization.
Other expenses increased 21.6% to $4.7 million for the nine months ended
September 30, 1999, from $3.9 million for the same period in 1998. This increase
was primarily due to an approximately $800,000 increase in advertising and
promotional expenses.
Income before managing directors' compensation and limited partners'
interest in earnings of subsidiary (prior to reorganization on August 24,
1999) and provision for income taxes increased 103.5% to $104.9 million for
the nine months ended September 30, 1999, from $51.6 million for the same
period in 1998.
Managing directors' compensation (prior to reorganization on
August 24, 1999) increased 72.9% to $56.2 million for the nine months ended
September 30, 1999, from $32.5 million for the same period in 1998 as a result
of our increased profitability.
Limited partners' interest in earnings of subsidiary (prior to
reorganization on August 24, 1999) increased 71.8% to $25.3 million for the
nine months ended September 30, 1999, from $14.8 million for the same period
in 1998 as a result of our increased profitability. In connection with our
reorganization, we acquired all the limited partner interests in LaBranche &
Co. for an amount in excess of book value.
Provision for income taxes increased 313.0% to $9.9 million for the
nine months ended September 30, 1999, from $2.4 million for the same period
in 1998 as a result of an increase in our profitability and the federal,
state and local income taxes to which we are subject as a result of our
reorganization from partnership to corporate form.
PRO FORMA OPERATING RESULTS
The following table sets forth our pro forma condensed consolidated
statement of operations for the three month period ended September 30, 1999
after giving effect to the reorganization and related transactions as if they
had occurred on July 1, 1999:
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<PAGE>
LABRANCHE & CO INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
(000'S OMITTED)
<TABLE>
<CAPTION>
PRO FORMA
ACTUAL ADJUSTMENTS PRO FORMA
------ ----------- ---------
<S> <C> <C> <C>
REVENUES:
Net gain on principal transactions $ 30,862 $ 30,862
Commissions 8,777 8,777
Other 2,003 2,003
---------- ----------
Total revenues 41,642 41,642
---------- ----------
EXPENSES:
Employee compensation and related benefits 7,743 $ 3,513 (a) 11,256
Lease of exchange memberships 2,121 2,121
Interest 2,319 1,405 (b) 3,902
225 (c)
4 (d)
(51)(e)
Amortization of intangibles 1,212 505 (f) 1,717
Exchange, clearing and brokerage fees 879 879
Occupancy 372 372
Communications 313 313
Legal and professional fees 257 257
Other 864 864
----------- ------------- ----------
Total expenses before managing directors'
compensation and limited partners' interest in earnings of
subsidiary and provision for income taxes 16,080 5,601 21,681
---------- ------------ ----------
Income before managing directors' compensation and
limited partners' interest in earnings of subsidiary
and provision for income taxes 25,562 (5,601) 19,961
MANAGING DIRECTORS' COMPENSATION 7,977 (7,977)(g) --
---------- ------------- -------------
Income before limited partners' interest in earnings
of subsidiary and provision for income taxes 17,585 2,376 19,961
LIMITED PARTNERS' INTEREST IN EARNINGS OF
SUBSIDIARY 4,290 (4,290)(h) --
----------- ------------- --------------
Income before provision for income taxes 13,295 6,666 19,961
PROVISION FOR INCOME TAXES 6,124 3,032 (i) 9,156
----------- --------- -----------
Net income $ 7,171 $ 3,634 $ 10,805
========== ============= ==========
Shares Outstanding 45,875
Earnings per share $ 0.24
</TABLE>
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<PAGE>
BASIS OF PRESENTATION
The Pro Forma Condensed Consolidated Statement of Operations was prepared
as if our conversion to corporate form and related transactions had taken place
on July 1, 1999. If our historical Condensed Consolidated Statement of
Operations had been prepared as our conversion to corporate form and related
transactions had taken place on July 1, 1999, earnings per share would have
increased by $.07 to $.24 for the three months ended September 30, 1999.
NOTES TO PRO FORMA ADJUSTMENTS
(a) Reflects managing directors' compensation based on revised
compensation policies implemented at the time of our reorganization
from partnership to corporate form. Under this policy, a compensation
pool of up to 30% of our pre-tax income, which is assumed to include
related employee benefits, is set aside for managing directors and
other employees. The pro forma compensation adjustment reflects
managing directors' compensation, which is comprised of an annual base
salary of approximately $8.2 million (33 managing directors at
approximately $250,000, on average) and bonuses payable under our
Annual Incentive Plan, as well as compensation expenses related to
the award to employees of restricted stock units of $14.8 million
which vest over 5 years and result in an annual expense of
approximately $3.0 million.
(b) Reflects interest expense with respect to the $100.0 million long term
debt represented by our 9.5% senior notes due 2004.
(c) Reflects interest expense with respect to the $16.0 million note,
bearing interest at a rate of 9.5% annually, issued as partial payment
for the acquisition of a limited partner interest.
(d) Reflects interest expense with respect to the $350,000 of subordinated
indebtedness, bearing interest at a rate of 8.0% annually, issued by
LaBranche & Co. in connection with the redemption of a limited partner
interest.
(e) Reflects reversal of the interest expense related to the $5.0 million
of subordinated indebtedness, bearing interest at a rate of 10.0%
annually, which was repaid in connection with our reorganization.
(f) Reflects amortization of intangibles related to acquisition of limited
partner interests in connection with our reorganization.
(g) Reflects reversal of the actual amounts previously recorded.
(h) Reflects reversal of limited partners' interest in earnings of
LaBranche & Co.
(i) Reflects federal, state and local income taxes at an estimated
effective tax rate of approximately 44%.
The pro forma condensed consolidated financial information has been
prepared by us and is not necessarily indicative of the results that would
have been achieved had the reorganization transactions occurred on the date
indicated or that may be achieved in the future. The pro forma consolidated
financial information should be read in conjunction with the pro forma
consolidated financial information and notes thereto included in our
prospectus filed with the SEC on August 19, 1999.
LIQUIDITY
Prior to our initial public offering of common stock and our senior
note offering, we had financed our business primarily through members'
capital and the issuance of subordinated indebtedness. As of September 30,
1999, we had $464.5 million in assets, $91.1 million of which consisted of
cash and short-term investments, which primarily consist of commercial paper
maturing within seven days. As of December 31, 1998, we had $272.2 million in
assets, $25.8 million of which consisted of cash and short-term investments.
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<PAGE>
During 1999, we increased and extended our line-of-credit with The Bank of
New York to $100.0 million. Amounts outstanding under The Bank of New York
credit facility are secured by our inventory of specialist stocks and bear
interest at The Bank of New York's broker loan rate. To date, we have not
utilized this facility. The credit facility matures on June 23, 2000.
As of September 30, 1999, the subordinated debt of LaBranche & Co. totaled
$46.5 million (excluding subordinated liabilities related to contributed
exchange memberships). Of this amount, $35.0 million represented senior
subordinated debt privately placed pursuant to several note purchase agreements.
Of this $35.0 million, $20.0 million matures on September 15, 2002 and bears
interest at an annual rate of 8.2%, payable on a quarterly basis, and $15.0
million matures on June 3, 2008 and bears interest at an annual rate of 7.7%,
payable on a quarterly basis. These notes are senior to all other subordinated
notes of LaBranche & Co. Subordinated debt totaling $11.5 million represents
junior subordinated debt of LaBranche & Co. placed with former limited partners,
their family members and our employees. This debt has maturities ranging from
November 1999 through the first half of 2001, and bears interest at an annual
rate between 8.0% and 10.0%, payable on a quarterly basis. The agreements
relating to the junior subordinated debt generally have automatic rollover
provisions which extend the maturities for an additional year, unless the lender
provides notice at least seven months prior to maturity. Concurrently with our
initial public offering and our senior note offering, we repaid $5.0 million of
the junior subordinated debt as part of the reorganization of our firm from
partnership to corporate form.
Concurrently with the initial public offering of our common stock and our
senior note offering and as part of the reorganization of our firm from
partnership to corporate form, we acquired all the limited partner interests in
LaBranche & Co. and the entire membership interest in LaB Investing Co. L.L.C.
for shares of our common stock, cash in the aggregate amount of $149.2 million
and subordinated debt.
Upon the completion of our senior note offering, we issued $100.0 million
aggregate principal amount of senior notes. The notes accrue interest at a rate
of 9.5% annually and mature in August 2004. The indenture covering the notes
includes certain covenants that, among other things, limit our ability to borrow
money; pay dividends on our stock or purchase our stock; make investments;
engage in transactions with stockholders and affiliates; create liens on our
assets; and sell assets or engage in mergers and consolidations.
At approximately the same time as our senior note offering and our
initial common stock offering, we issued a $16.0 million note as partial payment
for the acquisition of a certain limited partner interest in LaBranche & Co. The
note is payable in three installments of $6.0 million on the first anniversary
of issuance, $5.0 million on the second anniversary of issuance and $5.0 million
on the third anniversary of issuance, and bears interest at the annual rate of
9.5%. LaBranche & Co. also entered into a $350,000 cash subordinated loan
agreement, bearing interest at an annual rate of 8.0%, in connection with the
acquisition of a certain limited partner interest. In addition, on September 30,
1999, we repaid $1.1 million in indebtedness owed in connection with our
retirement plans, which amount had been reflected in our historical consolidated
statement of financial condition.
As a broker-dealer, LaBranche & Co. is subject to regulatory
requirements intended to ensure the general financial soundness and liquidity
of broker-dealers and requiring the maintenance of minimum levels of net
capital, as defined in SEC Rule 15c3-1. LaBranche & Co. is required to
maintain minimum net capital, as defined, equivalent to the greater of
$100,000 or 1/15 of aggregate indebtedness, as defined. NYSE Rule 326(c) also
prohibits a broker-dealer from repaying subordinated borrowings, paying cash
dividends, making loans to any parent, affiliates or employees, or otherwise
entering into transactions which would result
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<PAGE>
in a reduction of its total net capital to less than 150% of its required
minimum capital. Moreover, broker-dealers are required to notify the SEC
prior to repaying subordinated borrowings, paying dividends and making loans
to any parent, affiliates or employees, or otherwise entering into
transactions which, if executed, would result in a reduction of 30% or more
of their excess net capital (net capital less minimum requirement). The SEC
has the ability to prohibit or restrict such transactions if the result is
detrimental to the financial integrity of the broker-dealer. At September 30,
1999, LaBranche & Co. had net capital of $120.4 million, which was $119.5
million in excess of its required net capital of $899,000.
The NYSE generally requires members registered as specialists to establish
that they can meet, with their own net liquid assets, a minimum dollar amount
which is the greater of $1,000,000 or 25% of their position requirement. As of
December 31, 1998, due to the market share represented by our specialist book,
the NYSE mandated that, notwithstanding the general rule, we maintain minimum
net liquid assets of the greater of $90.0 million or 120% of the position
requirement, adjusted by the amount of the position requirement for any new
stock allocated to us as specialist. The position requirement is the ability to
assume positions in our specialist stocks of 30,000 shares of each S&P 500
common stock, 22,500 shares in all other common stocks, 4,500 shares in each
convertible preferred stock and 1,800 shares in each nonconvertible preferred
stock for which we act as a specialist. "Net liquid assets" for a specialist who
also engages in transactions other than specialist activities is based upon its
excess net capital as determined in accordance with SEC Rule 15c3-1. As of
September 30, 1999, our NYSE minimum required dollar amount of net liquid assets
was $92.4 million compared to actual net liquid assets of approximately $125.6
million.
Failure to maintain the required net capital and net liquid assets may
subject us to suspension or revocation of SEC registration or suspension or
expulsion by the NYSE.
On October 5, 1999, we contributed additional capital of $50.1 million
in cash to LaBranche & Co.
We currently anticipate that net proceeds from the initial public offering
of our common stock, our senior note offering and the additional $16.4 million
of indebtedness, which we incurred in connection with our acquisition of certain
limited partner interests in LaBranche & Co., together with our available cash
resources and credit facilities, will be sufficient to meet our anticipated
working capital, regulatory capital and capital expenditure requirements through
the end of 2000.
YEAR 2000
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish between 21st century dates
and 20th century dates. As a result, computer systems and/or software used by
many companies and governmental agencies, including computers involved in the
securities industry, may need to be upgraded to comply with such Year 2000
requirements. Otherwise, these systems could suffer system failure or
miscalculations that would disrupt normal business activities. Significant
uncertainty exists concerning the potential effects associated with the failure
to achieve compliance with the Year 2000 requirements.
We have made an assessment of the Year 2000 readiness of our
trading-related, communications and data processing systems. We participated in
the Securities Industry Association "streetwide" testing during the period of
February through April 1999. We believe that our main trading-related and
clearing systems are currently Year 2000 compliant. In addition, the NYSE has
assured us that their information and communications systems are Year 2000
compliant. We require vendors of material hardware and software components of
our information technology systems to provide oral assurances of their Year 2000
compliance. We intend to enforce these assurances from third parties to the
fullest extent permitted by law.
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<PAGE>
We cannot be sure that we will not discover Year 2000 compliance problems
that will require substantial revisions. In addition, we cannot be sure that
third-party software, hardware or services incorporated into our computer
systems will not need to be revised or replaced. This could be time-consuming
and expensive. If we fail to fix our trading-related, communications or data
processing systems or to fix or replace third-party software, hardware or
services on a timely basis, our business, financial condition and/or operating
results could be adversely affected. Moreover, our failure to address Year 2000
compliance issues adequately in our main trading-related, communications or data
processing systems could result in litigation which could be a costly and
time-consuming process.
In addition, we cannot be certain that the NYSE, trading counterparties,
governmental agencies, utility companies, third-party service providers,
including clearing houses and others outside our control, particularly other
broker-dealers, will be Year 2000 compliant. We believe that, in the worst case
scenario, the failure by any of these entities to be Year 2000 compliant would
induce a systemic failure beyond our control resulting in, among other things: a
loss or reduction in our trading volume; limitations on our ability to
effectively engage in specialist activities; or a prolonged telecommunications
or electrical failure.
The occurrence of any systemic failure, including those listed above,
could prevent us from engaging in specialist activities and could have an
adverse effect on our business, financial condition and/or operating results.
We have devised a contingency plan in the event of a Year 2000 system
related failure. After the close of business on December 31, 1999, we will back
up our entire system, creating a second backup system. Our staff will process
December 31, 1999 trades during the period between January 1, 2000 through the
open of trading on January 3, 2000, giving us 48 hours to resolve any potential
problems prior to the start of trading on January 3, 2000.
The total cost of our Year 2000 project is currently estimated to be
approximately $150,000. Costs related to the project are expensed as incurred,
and we have incurred substantially all of such costs as of September 30, 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
A majority of our specialist related revenues are derived from trading
as principal. We also operate a proprietary trading desk separately from our
NYSE specialist operations, which represented 6.2% of our total revenues in
the nine months ended September 30, 1999 and 1.8% of our total revenues in
1998. These activities involve primarily the purchase, sale or short sale of
securities for our own account. These activities are subject to a number of
risks, including risks of price fluctuations and rapid changes in the
liquidity of markets. In any period, we may incur trading losses in our
specialist stocks for a variety of reasons, including price declines of our
specialist stocks, lack of trading volume in our specialist stocks and the
performance of our specialist obligations. From time to time, we have large
position concentrations in securities of a single issuer or issuers engaged
in a specific industry. In general, because our inventory of securities is
marked to market on a daily basis, any downward price movement in these
securities will result in a reduction of our revenues and operating profits.
We have developed a risk management process which is intended to balance
our ability to profit from our specialist activities with our exposure to
potential losses. In addition, we have trading limits relating to our
proprietary trading activities.
Although we have adopted risk management policies, we cannot be sure that
these policies have been formulated properly to identify or limit our risks.
Even if these policies are formulated properly, we cannot be sure that we will
successfully implement these policies. As a result, we may not be able to manage
our risks successfully or avoid trading losses.
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<PAGE>
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
USE OF PROCEEDS FROM REGISTERED SECURITIES
The effective date of the Company's first Securities Act registration
statement on Form S-1, as amended (Registration No. 333-81079), relating to
the Company's initial public offering of shares of Common Stock, was August
18, 1999. The managing underwriters for the offering were Salomon Smith
Barney, Donaldson, Lufkin & Jenrette and ABN AMRO Rothschild. The offering
commenced on August 19, 1999, and, following the sale of shares of Common
Stock, the closing of the offering occurred on August 24, 1999. Of the
13,225,000 shares of Common Stock registered, 10,500,000 shares were offered
and sold by the Company for an aggregate offering price of $147.0 million.
The Company paid an aggregate of approximately $10.3 million for underwriting
discounts and $1.9 million for other expenses, none of which was paid to an
affiliate of the Company. The net offering proceeds to the Company after
deducting the total expenses were $134.8 million. From August 18, 1999 to
September 30, 1999, $56.4 million was used to redeem certain limited
partner interests in LaBranche & Co., and $78.4 million was used for
working capital. As of September 30, 1999, $72.2 million of the net offering
proceeds was invested in short-term, investment grade, interest-bearing
securities. Except in connection with our acquisition of all the limited
partner interests in LaBranche & Co. and the entire membership interest in
LaB Investing Co. L.L.C. as part of our reorganization, none of the net
offering proceeds were paid to any affiliates of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K have been filed during the quarter for
which this report is filed.
All other items of this report are inapplicable.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
November 15, 1999 LABRANCHE & CO INC.
By: /s/ George M.L. LaBranche, IV
--------------------------------------------
Name: George M.L. LaBranche, IV
Title: Chief Executive Officer and President
By: /s/ Todd Graber
--------------------------------------------
Name: Todd Graber
Title: Controller
-27-
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<PAGE>
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<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JUL-01-1999 JAN-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 72,161 72,161
<RECEIVABLES> 82,431 82,431
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<LONG-TERM> 115,815 115,815
0 0
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<COMMISSIONS> 8,777 26,662
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<NET-INCOME> 7,171 13,463
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